control their own destiny

18 August 2000

Irish dairy men choose to

control their own destiny

Irish dairying has a strong

tradition of co-operation.

Europe editor Philip Clarke

went to Eire for a closer look

SINCE the first butter co-op was set up at Dromcollogher, Co Limerick in 1889, co-operatives have dominated the dairy sector.

"Ireland is not unique in this respect," says John Tyrrell, director general of the Irish Co-operative Organisation Society (ICOS). "Throughout the world co-operatives are a major part of the dairy scene."

In Ireland, as elsewhere, the driving force has been the need for security. "Milk is a perishable product. You cant store it for weeks if the buyers back off," says Mr Tyrrell. "It is essential farmers own their own processing."

Despite some initial resistance – early pioneer Sir Horace Plunkett even faced death threats for being a dangerous subversive – the movement grew rapidly. By 1920 over 150,000 farmers were co-op members and, by the time Ireland joined the European Economic Community in 1973, that number would top 200,000.

Accession to the EEC, however, prompted a major shake-up as greater scale was needed to cope with a fast expanding milk supply and stiffer competition from the Continent.

But, while the co-ops got fewer and bigger, they still retained their traditional structure. Assets were owned by the members, policy was set by the board of elected farmers, day-to-day management was left to the chief executive officer.

That structure was soon to be challenged, however.

"The introduction of milk quotas in 1984 put a cap on production and income," explains Mr Tyrrell. "Co-ops that wanted to expand had to look elsewhere for finance."

With interest rates at 15%, that ruled out the banks. And so a handful turned to the stock exchange, setting themselves up as Public Limited Companies (PLCs).

Kerry was the first to convert, in 1986, followed by Avonmore and Waterford in 1988, (now merged to form Glanbia), and Golden Vale in 1990.

In fact these companies are not pure PLCs since all three retain some co-operative element – and all three are still members of ICOS.

Glanbia, for example, has about 55% of its shares owned by the Glanbia Co-operative Society, while 20% is held by individuals (mainly farmers) and the balance, 25%, by external investors. Kerry has a similar structure, though in different proportions.

Golden Vale, in contrast, has majority control in the hands of outside investors, (54%), with individuals owning just 46%. But farmers still retain control of the milk supply, through a subsidiary co-op.

Not surprisingly, there has been intense debate in Ireland over which is better – the PLC hybrid or the traditional co-op.

In terms of expansion, the PLCs have an impressive record. Over the first 10 years Kerry increased turnover by over 500%, Glanbia by 450% and Golden Vale by 300%, with numerous acquisitions and diversifications along the way. Together they now process over 50% of the Irish milk supply and have major overseas interests.

Share prices also took off following conversion, providing farmer members with unexpected windfall gains.

Reasons for this apparent success are not hard to find. Increased access to capital, bigger incentives for management to perform and the introduction of new marketing expertise and innovation all played a part.

"Conversion to a PLC has brought with it discipline in setting business objectives and achieving them," says Michael Patten of Glanbia, Irelands biggest operator with 6000 milk suppliers and about 30% of the milk pool.

But the PLC success story is a mixed one, insists Noel Horgan, general manager of the Tipperary Co-operative, a medium-sized co-op processing about 180m litres a year for some 600 milk suppliers.

"Their growth has been spectacular, but milk price is the real litmus test as far as dairy farmers are concerned." In this respect the PLCs have generally been outperformed, he claims.

"Im not against PLCs, but I do believe farmers should retain control," says Mr Horgan. "Initially there was quite a bit of pressure for us to go down the PLC route, especially when farmers saw the share price gains. But experience has shown it is not possible to serve two masters – paying a good return to shareholders and a good price to milk suppliers."

That point has been emphasised in recent weeks, with the co-ops swift to pass on gains in world skimmed milk powder prices to their members, while the PLCs have dragged their feet. And, as the dairy trade becomes more exposed to free market forces, the pressure on PLCs to buy their milk cheaply will grow.

The trends in share prices have also raised doubts about the benefits of PLC status. While Kerry has gone from strength to strength, climbing from a launch rate of 52p/share to a current value of almost Ir£11/share, Glanbia and Golden Vale have had a more turbulent time.

Glanbia, (as Avonmore and Waterford), had a launch price in 1988 of about 75p/share, climbing rapidly to over Ir£3.50/share. But since then it has slumped to just 51p/share following a number of poor investments, increased retailer pressure and the collapse of key markets in Russia and Asia for butter and pigmeat.

"Our members are no longer interested in converting," says Mr Horgan. "Most of our planned expansion can be funded from retained profit. Even if we had to borrow, with interest rates at 5% it would be cheaper to use the banks than institutional investors."

Having said that, Tipperary has recently introduced a share bonus scheme, where members are given additional £1 shares according to how much milk they sell or inputs they buy.

"This is to stimulate trade and enable farmers to build up something they can cash in when they retire," says Mr Horgan. But he admits it also has something to do with the presence of PLCs, who have shown farmers the intrinsic worth of their shareholdings.

The presence of the PLCs has had other effects on the 35 remaining dairy co-ops.

"It has kept them on their toes and made them look at the wider commercial environment," says Catherine Lascurettes, milk adviser to the Irish Farmers Association.

In particular, they have diversified. Tipperary, for example, has bought a cheese distributor in France to develop its Emmental operation, has acquired a local supermarket and, most recently, has invested in a major mushroom growing operation.

Further challenges lie ahead, with overcapacity at the top of the list (see panel). One thing is certain, however. Whatever change occurs, co-ops will continue to play a central role.

The system has served the farming community well, ensuring transparency of milk pricing, knowledge of processing margins and a rapid transfer of any market increase back to farmer members.

Irish producers are also well aware of the recent history in the UK following the demise of the Milk Marketing Board, the re-emergence of the private dairy buyers and the subsequent collapse of Milk Marque.

"It is a sorry example of producers losing control of their own processing and hence their own destiny," says Mr Tyrrell. "It has set the UK back 10 years. People here look at the UK and think – there but for the grace of God go I!"

Irelands co-ops remain very political organisations, says Catherine Lascurettes, and this could prove their Achilles heel as the industry shapes up for business in the new millennium.

"Major structural changes lie ahead. Ireland has 19 butter plants, 12 powder factories, 11 cheese plants, 21 bottling sites and 29 testing laboratories. This duplication has to be addressed."

Part of Irelands problem stems from its highly seasonal milk production. To stay competitive, farmers have been encouraged to go for low cost grass-based systems, drying cows off in the winter. The flip side is that much of the processing equipment lies idle during the winter, creating inherent inefficiency.

"The way forward has to be through joint ventures to co-ordinate processing," says Miss Lascurettes. "But this will not be easy, as the politics could get in the way."

To encourage such change, ICOS has recently circulated a major consultation document, setting out the options. These include further amalgamations and even the creation of a single processor co-op.

"If the co-ops dont start restructuring soon, they will be overtaken by their continental competitors," says Mr Tyrrell. "There is some reluctance among the smaller ones to change. But if they delay it will be too late."

The PLCs have already started to act. Glanbia has cut from seven processing sites to three, while a recent strategic review has identified nutrition products and cheese as key growth areas. "In five years time our product mix will look very different from what it is today," says Mr Patten, noting that beef has already been dropped from the companys portfolio.

Irish dairy co-ops snapshot

Number of dairy co-ops 38

Number with processing

co-ops 25

Number with PLC

structures 4

% of milk bought

by co-ops 99.5

% of milk processed

by co-ops 97

% of milk processed

into butter/smp 70

% of milk processed

into cheese 19

% of milk into fresh products 11

Biggest dairy companies (litres)

Glanbia (PLC) 1,360m

Dairygold (pure co-op) 820m

Kerry (PLC) 455m

Golden Vale (PLC) 410m

(Total Irish output = 5,000m litres)

% of total co-op turnover

(£6bn in 1994) 63%

Number of dairy producers

1984 70,000

2000 30,000

Average herd size 35 cows

Employment in

dairy co-ops 14,000

PLCs have generally been outperformed by the co-ops and farmers should retain control, says Noel Horgan, general manager of Tipperary Co-op.

Restructuring need

Irelands co-ops remain very political organisations, says Catherine Lascurettes, and this could prove their Achilles heel as the industry shapes up for business in the new millennium.

"Major structural changes lie ahead. Ireland has 19 butter plants, 12 powder factories, 11 cheese plants, 21 bottling sites and 29 testing laboratories. This duplication has to be addressed."

Part of Irelands problem stems from its highly seasonal milk production. To stay competitive, farmers have been encouraged to go for low cost grass-based systems, drying cows off in the winter. The flip side is that much of the processing equipment lies idle during the winter, creating inherent inefficiency.

"The way forward has to be through joint ventures to co-ordinate processing," says Miss Lascurettes. "But this will not be easy, as the politics could get in the way."

To encourage such change, ICOS has recently circulated a major consultation document, setting out the options. These include further amalgamations and even the creation of a single processor co-op. "If the co-ops dont start restructuring soon, they will be overtaken by their continental competitors," says Mr Tyrrell. "There is some reluctance among the smaller ones to change. But if they delay it will be too late."

The PLCs have already started to act. Glanbia has cut from seven processing sites to three, while a recent strategic review has identified nutrition products and cheese as key growth areas. "In five years time our product mix will look very different from what it is today," says Mr Patten, noting that beef has already been dropped from the companys portfolio.

Practically all milk from Irelands dairy cows is processed by farmer-owned co-ops. John Tyrrell of ICOS says it is vital that farmers own the processing capacity though further rationalisation is also vital.